lawyers in India

Negotiable Instruments Act, 1881 on Dishonour of Security Cheques

Written by: Surabhi Narula - Lawyer
Legal Professionals
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  • Cases of cheque bounce are not uncommon these days. In most of the transactions be it re-payment of loan or payment of fees for business purpose, payments are made by cheque. These cheques bearing large amounts sometimes remain unpaid and are returned by the bank on which they are drawn. For such cases punishment is provided by Section 138 of Negotiable Instruments Act, 1881 (hereinafter the Act). Offence of dishonour of cheque as mentioned u/s. 138 of the Act is considered as a criminal offence.

    Section 138 says: Dishonour of cheque for insufficiency, etc., of funds in the account

    Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both.

    Provided that nothing contained in this section shall apply unless-
    (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
    (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and
    (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

    Explanation For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability.

    This provision explains the direct recourse in case of dishonoured cheque without any debate. However, the problem arises when the cheque dishonoured is issued as a security cheque. Law is not clear whether such cheque can be submitted to the consequences of Section 138 of the Act or not. The position, whether the security cheque is attracted by the consequences of Section 138 of the Act or not, is rebuttable under the purview of Section 139 of the Act.
    Section 139 of the Act says: Presumption in favour of holder: It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.

    In view of the decision of Supreme Court in the case of Adalat Prasad v Roop Lal Jindal and others once the cheque has been issued and the same has been presented and upon its dishonour the procedure prescribed for issuance of notice had been followed, the presumption under section 139 arises immediately.

    The presumption can be rebutted by adducing evidence and the burden of proof is on the person who wants to rebut the presumption. Therefore, if the accused proves with the help of evidence, be it direct or circumstantial, that the cheque given as security was not for discharge of any liability then the onus to prove that the cheque was in discharge of some liability shifts on plaintiff. In case the plaintiff fails to prove his case then the decision will be in favour of accused. In such cases accused is not required to proof the case beyond a reasonable doubt.

    Contrary to the above view, Justice Rao in one of the matters on the same issue observed that " A cheque whether issued for repayment of a loan or as a security makes little difference under Section 138 of the Act. In the event of a dishonour, legal consequences are same without distinction".

    However, the High Court of Delhi in the case of M/s Datt Enterprises ltd. v V.K.Dua and Another after evaluating the evidence presented by the parties held that the security cheque does not attract the provisions of section 138 of the Act. Court observed that plaintiff made false allegations towards the defendant. The cheques were given as a security cheque as per past practice and pending reconciliation of accounts and not towards discharge of any liability.

    Same observation was reiterated by the Court in the case of M.S. Narayana v State of Kerala where the Court observed that: ?The evidence adduced by the parties before the trial court could lead to once conclusion that the Appellant had been able to discharge his initial burden. The burden thereafter shifted to the Second Respondent to prove his case. He failed to do so. Further the Sinha.J observed that The Appellant clearly said that nothing is due and the cheque was issued by way of security. The said defence has been accepted as probable. If the defence is acceptable as probable the cheque therefore cannot be held to have been issued in discharge of the debt so far, for example, if a cheque is issued for security or for any other purpose the same would not come within the purview of the Section 138 of the Act.

    Conclusively, we can say that from the above-mentioned authorities it is evident that with respect to the dishonour of security cheques position is still not clear. It is subject to presumption and proof thereof that may be given by either party in support of their case.

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